1.Competitive Developments in Small and Rural Markets -
In the Notice, we requested information and comment regarding issues specific to video programming distribution in rural and smaller markets.705 Small cable operators and telephone companies have video subscribership ranging from 50 subscribers up to 100,000 subscribers. These relatively small numbers belie the fact that in the aggregate small cable operators and telephone companies serve a significant percentage of the MVPD market. The American Cable Association reports that its 1,100 members serve approximately eight million subscribers, or 12 percent of total U.S. cable subscribers.706 Their principal competitors are DBS operators DIRECTV and EchoStar, which have higher penetration rates in rural markets than in urban or suburban markets.707 Many small and rural MVPDs are rolling out advanced services, including Internet access, VoIP, DVR and VOD.708 OPASTCO states that its members experience increased subscription rates when they bundle broadband services with video services.709
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Generally, small and rural cable operators and telephone companies serve very small numbers of subscribers in communities that experience little or no population growth. These demographics can limit their ability to raise capital for plant and equipment upgrades that will allow these small operators to compete with MVPDs having larger regional or national distribution platforms, such as cable MSOs and DBS, respectively. Thus, small and rural cable operators and telephone companies argue that a major factor limiting their ability to compete is the lack of a cost-effective means to receive and distribute video services.710 NRTC, which represents approximately 1,200 rural utilities and affiliates in 47 states, states that many of its members distribute DIRECTV’s service, but many also are pursuing a multi-platform approach, including satellite, wireless technologies, fiber platforms, and broadband-over-power line technologies, in order to compete for video subscribers.711 OPASTCO reports that its rural LEC members are becoming MVPDs by exploiting newer technologies.712 NRTC states that it is focused on providing its members with cost-effective access to television programming by using a low-cost, end-to-end IPTV delivery system, with commercial deployment expected in early 2006.713 NRTC reports that it has entered into an agreement with satellite operator SES-AMERICOM to support and market to its members a service called “IP-Prime,” a centralized, satellite-delivered IPTV/MPEG-4 video distribution platform, which will enable small and rural operators to use standard headends to receive signals that can be bundled with standard-definition and HD programming, high-speed Internet, and telephony services.714 NRTC reports that a commercial rollout of the IP Prime system is expected in the second quarter of 2006.715
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Access to must have programming, including major national cable networks and regional sports networks, on a timely basis and at competitive rates is a key competitive issue for all MVPDs. Small and rural cable operators and LECs planning to offer video programming complain that securing access to programming is cumbersome and expensive.716 NTCA, a trade association representing more than 560 rural telecommunications providers, reports that small providers lack leverage in their negotiations with video content providers. It states that its members who provide video service spend approximately 50 percent of their operating expenses for programming, adding that it expects that percentage to increase in the future. NTCA adds that rural subscribers are penalized because its member companies serve fewer subscribers than medium- and large-sized MSOs.717 In addition, NTCA states that some of its members that have analog cable systems are being required to upgrade their facilities to digital in order to gain rights to carry certain programming.718 NRTC believes that programming providers are hesitant to enter into programming agreements with small and rural LECs that plan to use an IPTV platform due to concerns about digital content copyright infringement.719 ACA, which represents small cable operators, states that more than half of its members serve fewer than 1,000 subscribers. ACA states that many of its members lack leverage in dealing with large programmers, and that retransmission consent fees will add approximately $1 billion to the cost of basic cable service in the small cable sector.720 ACA asserts that “lighter regulatory burdens and costs” of DBS have ensured its success in competing against cable operators in small and rural markets.721
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Many small cable operators purchase video programming through buying cooperatives, such as the National Cable Television Cooperative (NCTC), which represents approximately 1,000 independent cable operators serving approximately 14 million subscribers nationwide.722 NCTC negotiates master agreements with cable programming networks, cable hardware and equipment manufacturers, and other service providers on behalf of its membership. Through NCTC, small cable operators earn volume discounts to which they would not be entitled on their own. Disney states that it provides volume discounts to NCTC on behalf of rural cable operators for each of its national programming services, and adds that 99 percent of NCTC’s members opted into ESPN’s most recent carriage agreement negotiated with NCTC.723
2.Competitive Developments in the MDU Market -
Multiple dwelling units (MDUs) comprise a separate segment of the MVPD market because alternative video providers may have difficulty offering service in MDUs in competition with an incumbent provider.724 To some extent, competitive choices for MDU residents have been limited, especially from DBS, since many MDU residents do not have the line-of-sight necessary to receive DBS service.725 DIRECTV reports, however, that it has simplified the delivery of its satellite TV to customers living in apartment buildings.726 It announced a “single wire” distribution system that makes it possible for DIRECTV to combine all signals from its satellites on a single wire running to multiple set-top boxes in a building.
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Exclusive contracts are those that specify that video service in an MDU will be provided only by a particular MVPD. Perpetual contracts are those which grant an MVPD the right to provide service for an indefinite or very long period of time, or which have automatic renewal provisions (sometimes referred to as “evergreen” clauses). Competitive entrants into the MVPD market have raised concerns with these kinds of contracts for the past several years. As it did the last two years, BSPA identifies exclusive, long-term MDU access contracts as a barrier to entry.727 Verizon also raises this issue.728
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